Investors have likely noticed a particular phrase appearing in recent financial news headlines, and for good reason. “Market correction” has been been the catch phrase du jour as the stock market continues to wobble in early 2022.
As of Thursday afternoon, the Nasdaq Composite Index was down nearly 15% so far this year. The Dow Jones Industrial Average and S&P 500 have fared slightly better, but have fallen 6% and 9%, respectively, so far this year.
When a market index falls more than 10% from a recent high, the drop is considered a correction. These declines understandably spook investors and stoke fears of a coming bear market. But as the Schwab Center for Financial Research points out, corrections typically don’t lead to full-blown bear markets. While prudent to prepare for the worst and hope for the best, there’s good reason not to panic at the first sign of a correction, as Schwab points out.
A financial advisor can help protect your portfolio from corrections and more severe downturns. Find a trusted advisor today.
Corrections vs. Bear Markets
A correction is typically when a market index drops more than 10% but less than 20% from its most recent high. For most investors, that’s bad news. A plunge that’s more severe is typically classified as a bear market, even worse.
But when an index enters correction territory, like the Nasdaq Composite in 2022, it doesn’t mean things are destined to get even more bleak. While corrections are bad news, they are more common than you may think. As Schwab points out, there have been 24 market corrections since November 1974. Only five became bear markets, the most recent of which occurred in early 2020 at the start of the COVID-19 pandemic. However, that bear market was relatively short-lived, lasting only 33 days and giving way to yet another bull market.
What History Tells Us About Bull and Bear Markets
Examining the S&P 500’s track record over the last five-plus decades can offer some important perspective when it comes to reacting to market volatility, especially for retirement savers with longer time horizons. According to the Schwab data, the average bear market since 1966 has lasted 446 days. On the other hand, bull markets or periods of prolonged growth, have lasted 4.5-times as long – 2,069 days on average.
In fact, the longest bull market since 1966 spanned nearly 4,500 days, stretching from 1987 to 2000. By comparison, the period that followed was the longest bear market in decades, lasting 929 days, according to Schwab.
Bull market returns are also outsized compared to the losses suffered during bear markets. The S&P 500 has gained an average of 209% during the eight bull runs since 1966. Meanwhile, the index posted an average loss of 38% during the five bear markets that have occurred since then.
Of course, that’s not to say that corrections and bear markets do not have serious economic implications and shouldn’t be taken seriously. The S&P 500 fell 49% and 57% during a pair of bear markets that lasted a combined 1,446 days during the 2000s.
Bottom Line
Recent market volatility has many investors wondering whether a correction is imminent. While corrections certainly aren’t pleasant, they don’t automatically lead to bear markets. Since 1974, only five corrections have given way to bear markets. In fact, bull markets have been more common and lasted longer than their counterparts, underlining the importance of patience and careful planning.
How to Protect Your Retirement Savings
- It can be difficult to ignore your own feelings and manage your investments unemotionally. That’s when a financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Experts recommend rebalancing your portfolio regularly to bring your asset allocation back in line with your original targets. Assets that have gained in value over time may account for an outsized percentage of your portfolio and leave you more vulnerable to market volatility. Rebalancing typically involves selling a portion of these positions and buying others that have become underweighted.
- Depending on how far off you are from retiring, doing nothing in the face of market volatility may be your best option. Investors who panicked and withdrew their retirement savings during the 2020 crash missed out on the bull market that followed. Those who are nearing retirement may consider shifting some of their 401(k) assets to an annuity for a guaranteed income stream or perhaps delaying retirement to lock in higher Social Security benefits.
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